The Collapse

Bringing Down Bear Stearns

From left: former Bear Stearns C.E.O.’s Alan Schwartz, James Cayne, and Alan “Ace” Greenberg, in front of the firm’s former headquarters, in New York City., First page: By Roger Wollenberg/UPI Landov, James Lense/Corbis (building), Oscar Hidalgo/The New York Times/Redux, Jennifer Altman/Bloomberg News/Landov. Second page: Photograph by Jacques Del Conte (background). By Daniel Barry/Redux (Paulson), Matthew Cavanaugh/EPA/Corbis (Dimon), J.Scott Applewhite/A.P. Images (Bernake).

On Monday, March 10, the rumor started: Bear Stearns was having liquidity problems. In fact, the maverick investment bank had around $18 billion in cash reserves. But soon the speculation created its own reality, and the race was on to keep Bear’s crisis from ravaging Wall Street. With the blow-by-blow from insiders, Bryan Burrough follows the players—Bear’s stunned executives, trigger-happy reporters at CNBC, a nervous Fed, a shadowy group of short-sellers—in what some believe was the greatest financial scandal in history.

On Monday, March 10, Wall Street was tense, as it had been for months. The mortgage market had crashed; major companies like Citigroup and Merrill Lynch had written off billions of dollars in bad loans. In what the economists called a “credit crisis,” the big banks were so spooked they had all but stopped lending money, a trend which, if it continued, would spell disaster on 21st-century Wall Street, where trading firms routinely borrow as much as 50 times the cash in their accounts to trade complex financial instruments such as derivatives.

Still, as he drove in from his Connecticut home to the glass-sheathed Midtown Manhattan headquarters of Bear Stearns, Sam Molinaro wasn’t expecting trouble. Molinaro, 50, Bear’s popular chief financial officer, thought he could spot the first rays of daylight at the end of nine solid months of nonstop crisis. The nation’s fifth-largest investment bank, known for its notoriously freewheeling—some would say maverick—culture, Bear had pledged to fork over more than $3 billion the previous summer to bail out one of its two hedge funds that had bet heavily on subprime loans. At the time, rumors flew it would go bankrupt. Bear’s swashbuckling C.E.O., 74-year-old Jimmy Cayne, pilloried as a detached figure who played bridge and rounds of golf while his firm was in crisis, had been ousted in January. His replacement, an easygoing 58-year-old investment banker named Alan Schwartz, was down at the Breakers resort in Palm Beach that morning, rubbing elbows with News Corp.’s Rupert Murdoch and Viacom’s Sumner Redstone at Bear’s annual media conference.

It was an uneventful morning—at first. Molinaro sat in his sixth-floor corner office, overlooking Madison Avenue, catching up on paperwork after a week-long trip visiting European investors. Then, around 11, something happened. Exactly what, no one knows to this day. But Bear’s stock began to fall. It was then, questioning his trading desks downstairs, that Molinaro first heard the rumor: Bear was having liquidity troubles, Wall Street’s way of saying the firm was running out of money. Molinaro made a face. This was crazy. There was no liquidity problem. Bear had about $18 billion in cash reserves.